Friday, January 14, 2011

Some Partial Answers -- For Matt Herper, And Derek Lowe -- Was The Schering-Plough Deal A Mistake?

During the evening last night, both Derek Lowe (writing at "In the Pipeline" for Corante) and Matt Herper (writing for "The Medicine Show", at Forbes) echoed Sanford Bernstein's Tim Anderson's comments. They each asked whether the Vorapaxar troubles render the whole Schering-Plough "merger as bust-up stategy" a non-starter. My answer?

No, not just this one event.

However, if the J&J arbitration comes out materially against New Merck, and in favor of Centocor/J&J -- either via an outright win in arbitration for Schering-Plough/Merck's opponent, or via a settlement that removes more than 50 percent of the Remicade® and Simponi® profits -- then, I think the transaction was (largely) a failure. [I've been posting on this for nearly a year.]

Consider: Many, many independent analysts had projected Vorapaxar 2016 revenues at $5 billion annually, essentially handing it the mantle once held by Plavix (which goes generic in 2012). Now consider that another $7 to $10 billion in revenues could be lost in just the next three years via the J&J arbitration -- on Remicade, and Simponi. In addition to the revenue loss, though -- Merck could be liable to pay damages, out of net profits, of over $3 billion, for the past nearly two years of "wrongful, breaching" sales (March 2009 transaction announcement, to either the present -- or to arbitration decision date: say, February 2011).

If at least $15 to $20 billion of the "merger value" is now gone -- and Merck paid $41 billion for these assets, it looks like Merck "overpaid" by as much as 50 percent. Let's not forget the clank of Saphris® (CEO Hassan in 2008: a "blockbuster" -- when, in fact, life to date, less than $300 million; immaterial to New Merck); the study failures of Acadasine® and Vicriviroc; and finally the non-pursuit of AV-299, AN-2690 and Ampakine®.

Oops. Wait: I didn't even mention Proventil® (Warrick's albuterol -- over $300 million in damages, thus far -- for pricing fraud); nor ENHANCE -- and Vyotrin®'s endless swoon -- but I should. All of these are Hassan-Cox-Bertolini-Sabatino legacies. These, all together, represent at least $17 to $22 billion of value "lost".

In any event, here is how Matt Herper (Forbes online edition) set the question, overnight:

. . . Early this morning, Sanford C. Bernstein analyst Timothy Anderson, a Merck bull, issued a note to investors that asked whether failure for vorapaxar would lead to questions about the Merck-Schering merger. . . . Anderson’s words:
"The fact that vorapaxar came from Schering-Plough, and was a key asset at Schering, will partly call into question the value of Merck buying Schering-Plough. In reality, Schering-Plough had a lot more to offer than just [Vorapaxar]. Another key asset that came from Schering-Plough was Remicade (rheumatoid arthritis), but recall that J&J is trying to claw back rights to this product, claiming that MRK’s acquisition of SGP triggered a change in control. The matter is up before arbitration, and has been a partial overhang on MRK. Resolution is likely in [early 2011]. . . ."

Asked about whether the merger still made sense, a Merck spokesman replied that the deal was bigger than any one drug. . . .

But not likely bigger than the likely $17 to $20 billion of losses we've described above -- paying $41 billion for something that just lost nearly $20 billion in value -- is a losing proposition. In short, New Merck got "suckered-into-it" by Hassan and Cox -- in much the same way Pfizer did (same two executives) in buying Pharmacia, just under a decade ago. Some things never change.


Anonymous said...

Wait. I'm confused. Didn't S/P buy Merck? Isn't that the defense against the litigation by J/J? Yet, here is an analyst admitting that Merck bought S/P?

condor said...

You are -- of course -- correct.

This putative avoidance of J&J's rights, via legal ledger-domain/contortions (like so many other things Schering-Plough) is a case of the SGP lawyers trying to be "too cute," by (more than) half.


Anonymous said...

Merck's got a lot of smart people and they really know drug development. I kind of doubt that Merck couldn't have seen a lot of the risk.

BTW in the 90's when Pfizer and Glaxo were doing lots of mergers Merck used to say that they didn't buy other companies because you almost never could recover or grow faster than without the merger.